Friday the 13th

by JDH on April 14, 2012

For those of you who read these musings when they are published on Saturday morning, yesterday was Friday the 13th.  (If you read these brilliant examples of sardonic wit after Saturday, why do you wait? I try to have my weekly ramblings published by 9:00 am on Saturday morning). In my part of Southern Ontario, Friday the 13th means one thing: motorcycles in Port Dover.

Port Dover is a small town on the shores of Lake Erie, with an interesting tradition: every Friday the 13th, bikers from around Ontario, and other areas, travel to Port Dover to hang out for the day.  It’s not well attended when Friday the 13th is in the middle of wintery February day, but yesterday the weather was good, and lots made the trip.  The next Friday the 13th is in July, so attendance will be huge.  The roads in Ontario are filled with bikers heading for the party.  Apparently a fun time is had by all, since to most of the bikers are in their 40s, 50s and 60s, so it’s not exactly Woodstock.

In fact, it would not surprise if, as they sit around the streets of Port Dover shooting the breeze, the topic of discussion may be the stock market.

The stock market, which this week dropped (TSX down .52%, DOW down 1.61%, and the S&P500 down 1.99%).  Are we near an inflection point?  Perhaps.

The uptrend from the low in October remains in place (depending on how you draw your lines, but the market has slipped in April, and is now down below it’s 50 day moving average, although just barely.  The RSI didn’t get above 50 and is turning down, so a further correction is very possible.

But it’s an election year, so I would assume the powers that be will do everything in their power to keep printing money to support the market.

On the year the DOW is still up over 5%, and the s&P 500 is up almost 9%, so clearly the four people who are still buying stocks still think it’s a good deal.  For now.

Even our old friend Mr. Dines, of The Dines Letter, said yesterday, referring to the markets: “Something is going on backstage, and we can’t quite put our finger on it, although we sense that it is probably important.”  He goes on to speculate that higher interest rates, a stronger US dollar, or inflation in China could be problems.  Massive government money printing probably isn’t helping much either.

You would think in this uncertain environment gold would be very strong, and you would be partially correct.  Gold was up 2.28% on the week, and is up 5.73% on the year, so it outperformed the markets this week, but still lags on the year.  Gold stocks might be showing signs of life.  Or not.

Gold peaked back in September with a double top just over $1,900, and then proceeded to drop down through $1,550 by the end of the year.  It’s trying to recover, and has done well over the last week, but it remains below both it’s 50 day and 200 day moving averages.  Individual gold stocks are doing even worse.

AEM.TO – Agnico-Eagle Mines Ltd., a gold blue chip, was over $85 at the end of November; today: $33.30.  I’ll help you with the math: that’s a drop of 60%.  Some of that drop is related to company-specific news, like the flood at their Goldex mine, leading to a class action lawsuit.  But Goldex was 15% of total production, so a 60% drop is arguably unwarranted.

Here’s the kicker: Agnico-Eagle pays a dividend of 80 cents a share, so at a stock price of $33.30 that’s a dividend rate of 2.4%.  That’s better than the 0% you get on a T-bill or bank account.

At these depressed levels some bottom feeding purchasing may be in order.  What’s the risk to holding this stock long term?  Not much.  Even if the price continues to drop you earn 2.4% forever (they’ve paid a dividend for 30 years, and just increased it).  Sounds like a no brainer to me.

You could argue that it’s not a good bet, since the stock is trading not that far from where it was in May, 1996 (around $27), and that would be true.

However, we are now back to the October, 2008 low of $33, after the crash, so this could be a very important bottom.

I don’t see the stock going much lower than where it is, so I will continue to hold the shares I own, and I may consider some stink bids at $32.50 (which would have been filled three times already this month, so it’s not that low a level).

I’m not suggesting that you bet the farm on AEM.  There are lots of better looking gold stock charts, like FNV.TO – Franco-Nevada Corp.:

This is a much more stable chart, and if the recent weakness is coming to an end, this may be a good buying opportunity.

Why do I say “may” be a good buying opportunity, not “is”? Because as we observed in October, 2008 a general market crash drops everything, good and bad.

My plan, therefore, is to start dipping my toes in the water, but I’m not jumping in.  Currently I’m 50% in cash, so I may up that to 60% invested over the next week or two, but maintain a cash balance to deploy on future weakness.

Those are my thoughts, such as they are.  Thanks for reading; see you next week.

 

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